Professor of economics, New York University

David Robinson

As published in Scotsman Guide's Residential Edition, May 2010.

The Federal Housing Administration (FHA) has experienced substantial losses to its Mutual Mortgage Insurance Fund (MMIF) and faces a likely government bailout, according to Andrew Caplin, professor of economics and co-director of the Center for Experimental Social Science at New York University. He and several co-authors noted as much in a recent study using Los Angeles County data (sctsm.in/w15802), and he said so in testimony (sctsm.in/Caplin0310) to a House Financial Services Subcommittee this past March. He tells us more.

What is your primary concern with FHA?

FHA’s actuarial report [for fiscal year 2009], stating that government support won’t be needed, is extraordinarily compromised. The losses to the MMIF are much higher than the FHA states. Why [FHA hasn’t] apologized and redone the numbers is beyond me. At some point, FHA will have to go to Congress for money.

How has the FHA responded to your study and testimony?

[FHA officials] say our study is flawed. They state that other studies have been done and that it can’t be confirmed that FHA is going to go bankrupt.

In your House-subcommittee testimony, you stated that FHA must change the way it determines potential losses. How?

To build a better loss model, the FHA needs to correctly identify streamline refinances, get the initial [loan-to-value ratio] correct on these refinances, use less-biased measures of home value, and incorporate delinquency and modifications that are ongoing —which are early warnings on future losses. When all four modeling changes are made, we will have a legitimate loss estimate.

Do you consider the FHA’s recent actions, including the addition of a chief risk officer and changing some key underwriting guidelines, to be partial solutions?

[FHA must] show that the particular measures are important. As yet, [FHA has] no demonstration of their quantitative significance. Indeed, [FHA] cannot do this at present, given [FHA’s] limited knowledge of the trajectory of losses.

How do we avoid an FHA bailout?

FHA has to ensure that the existing mess is sorted out. The large mass of at-risk mortgages will be defaulting in large numbers in the coming years unless there is a very shocking turnaround in the economy and the housing market. [FHA has] to get modern regarding risk assessment and evaluation. Be more innovative, for example, in the form of shared-equity finance. 

We’re looking to make sure that when the problem occurs — the need to use taxpayer funds for a bailout — FHA can’t say it was “shocked” [or] that [the bailout] was unpredictable. A bailout is inevitable. The question is how to demonstrate better control so that this will not be needed in the future.

David Robinson, former editor of Mortgage Originator magazine, is a California-based writer and editor. For questions or comments about this article, e-mail articles@scotsmanguide.com.